Sears shines - for the moment

NEW YORK (Fortune) -- Sears Holdings reported fourth quarter earnings this morning that beat analyst estimates, helping to send Sears shares up nearly 8% in early trading. While I hate to rain on positive news, especially since it's so rare lately, it's hard to get excited about Sears' prospects for 2009 and beyond.

Here are three things to watch in the coming year:

Unlike many large retailers, which are losing money, Sears reported a fourth quarter profit of $190 million, or $1.55 a share. That's better than Wall Street had expected, but it's also down 55% from the $426 million, or $3.17 a share, of a year earlier.

Analysts are predicting profits will fall even further in 2009, and one even suggests they may disappear altogether. "It will be nearly impossible to remain profitable in 2009 as consensus currently thinks," Morgan Stanley analyst Gregory Melich wrote this morning in a note to clients. He is assuming that sales at stores open at least a year continue to decline in the high single digits (they dropped 8% in 2008) and that Sears' operating margins remain similar to 2008.

A looming question for Sears is whether it will finally hire a CEO, after searching for more than a year. Sears Vice President Bruce Johnson has held the position on a temporary basis since Feb. 2, when former CEO Aylwin Lewis stepped down.

In his annual letter to shareholders, posted on Sears' web site this morning, Chairman Eddie Lampert said that although Sears has talked to several candidates, the company has "not made a single employment offer to anyone to serve as our CEO," explaining that Sears is being "highly selective" in its search.

"That doesn't mean that we have not reached out to a number of people to explore opportunities or that we haven't had a number of meetings and interviews," he wrote. "We have. But, thanks to Bruce Johnson's efforts and our board's confidence in him as interim CEO, we can be highly selective in our search."

Lampert, of course, is the hedge fund manager who in 2004 used the reorganized stock of Kmart, which he rescued from bankruptcy, to acquire Sears, Roebuck & Co., thus combining the two retailers and creating Sears Holdings.

Being selective is good, but Sears does not have an endless amount of time to get its act together. Although Sears has hit on some good ideas, like promoting layaway, which helped boost sales during the holidays, it competes against fierce rivals, including Target, Wal-Mart and J.C. Penney, who are taking market share on a daily basis. In fact, the brain drain at Sears is so worrying to Barclays Capital analyst Robert Drbul that he calls the need to bulk up on talent "one of the biggest issues they are facing."

Sears will begin talking to its banks in the next few months about renewing a $4 billion revolving credit facility. The things to watch will be the amount of the new facility and the terms on which it is renewed.

Sears had $1.3 billion in cash at the end of 2008 and $2.3 billion in debt, of which $559 million is debt of Sears Canada and Orchard Supply Hardware and is non-recourse to Sears Holdings.

In the meantime, analysts expect earnings before interest, taxes, depreciation and amortization (EBITDA) to continue to shrink. EBITDA has been falling at about $1 billion a year, down from $3.6 billion in 2006 to $1.6 billion in 2008. Another similar sized drop in 2009 would leave Sears with a much smaller cushion to service its interest payments, which total about $225 million a year.

Meanwhile, unlike other retailers, which have suspended stock buy back programs to conserve capital, Sears continued purchasing shares in 2008 -- Sears repurchased 2.9 million shares for $120 million in the fourth quarter alone. Some investors may take that as a sign of management's confidence in the business. Indeed, Lampert, in his letter, wrote that, "we are well positioned now at Sears Holdings to operate through a difficult economy, and we are preparing to rebound strongly when the economy stabilizes."

A spokesman notes that "our same-store-sales trend at Kmart has improved significantly, in part due to layaway sales that grew at approximately $120 million in the 4th quarter. Our online business continues to expand. Lands' End had another record year of profitability and in the last three quarters our market share in home appliances has grown. We continue to operate world class brands and will market them more effectively and aggressively in 2009."

But with few outward signs that any type of groundwork is being laid for a real recovery, betting on Sears over the long term seems like risky business.